NEWS & INSIGHTS  |  SECOND QUARTER 2026

Lost in Space

July 2, 2026

By Mark Oelschlager, CFA

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In the 1960s, the science fiction TV series Lost in Space followed the adventures of the Robinson family, who had been sent by the United States to colonize space but ended up off track.  The show re-aired regularly in the 1970s and 1980s and developed a cult following.

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Toward the end of the second quarter investors seemed lost in space, as they diverted their focus from AI stocks to Elon Musk’s SpaceX, the largest initial public offering in history.  Musk sees great potential in the use of space, and his loyal devotees, who have witnessed the ascension of Tesla into one of the most valuable companies in the world, are believers.  Early trading in SpaceX was more characteristic of a meme stock than a $2 trillion company, as its market value swung wildly.  Incredibly, its market capitalization briefly surpassed that of Amazon and Microsoft, leaving it behind only a few companies on the planet.  This is highly unusual for an IPO.  By comparison, Amazon was worth less than $1 billion at its IPO, Tesla was about $2 billion, and Google was $27 billion.

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The delayed entrance into the public market of such a valuable enterprise reflects the increased comfort with, and growing influence/size of, private markets.  The line between private and public markets has become somewhat blurred, and the company had adequate access to capital well before going public.

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Since its IPO, Google (Alphabet) stock has increased by about 160-fold.  Not 160%.  160 times.  Amazon has grown by more than 5,800 times.  For investors in SPCX hoping to achieve similar growth as was seen in Google, the company would need to reach a market value of $352 trillion – more than double the value of all the publicly traded companies in the world.  To match Amazon’s growth, it would need to grow to $13 quadrillion, which would make it worth 13 times the value of all global financial assets, real estate, and commodities combined.  It goes without saying that this is unlikely to happen.

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That doesn’t mean it’s impossible for SpaceX to be a good investment.  But with the stock trading for more than 100x sales – danger, Will Robinson - and the company not even turning a profit, an awful lot has to go right.

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Tech stocks returned with a vengeance in the second quarter, and some AI stocks went parabolic.  Current capacity is not sufficient to meet the demand for some components needed in the AI buildout.  Thus, those with the capacity, such as memory semiconductor companies Micron and Sandisk, are seeing almost unheard of gains in profits, due to a spike in both volume and pricing power.  This “supercycle” in an area of the economy that is typically defined by cyclicality is reminiscent of the commodities boom in the 2000s.  That boom was preceded by underinvestment in capacity that was then met with a spike in demand from emerging markets – mainly China.  This drove the energy and commodity stocks to new heights - until the market adjusted and many of the stocks faltered.

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The hyperscalers (Alphabet, Amazon, Meta Platforms, Microsoft, and Oracle) are driving much of the AI buildout.  In 2024 their collective capital expenditure was an already-enormous $240 billion.  This year it is expected to be $770 billion.  That is a staggering rate of growth that in our opinion can’t continue for long.  Will the capital markets at some point become less friendly?  Will the rate of AI adoption eventually slow?  Will businesses adjust to these supply constraints to avoid paying ever higher prices?  Will the economics of selling AI compute disappoint due to competition and lack of differentiation?

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The intense focus on AI and SpaceX overshadowed what would normally be considered an important event: the swearing in of a new Federal Reserve chair and a change in tone from the central bank.  At the beginning of the year the market was expecting cuts in interest rates to occur at some point in 2026.  As so often happens with Fed policy, things change, and it appears those projections will not come to fruition.  A strong labor market and stubbornly high inflation have elicited tough talk about higher rates from new Chair Kevin Warsh, whom President Trump selected with the idea that he would reduce rates.  Warsh seems to be even more committed to reducing the size of the Fed’s balance sheet, which we would endorse.  In our mind this balance sheet tool should be used by the Fed only in emergencies.  It’s possible or even likely that the expanded balance sheet of the Fed has provided a tailwind for financial assets for many years.  It would seem prudent to at least consider the idea that this tailwind may fade as the central bank adopts a new paradigm.

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One of the supports for the market in the second quarter was the progress toward an agreement between the US and Iran.  While the two sides negotiated, a ceasefire was put into place, and that ceasefire was then ignored on what seemed a daily basis.  Even after a “memorandum of understanding” was signed by the two nations, the fighting and disagreement on various issues continues, and oil remains well above its pre-war level, though it has retraced most of the war-induced spike.

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The stock market has become bifurcated, with the AI beneficiaries on one side and the non-AI companies on the other.  While most of the large semiconductor and semiconductor equipment stocks trade at a sky-high 50-100x free cash flow, we remain focused on securities with more earthly prices and expectations.  During the quarter, our performance lagged the AI-propelled major indices, but our flagship Towpath Focus Fund did post its 15th consecutive quarter of positive returns.  For context, the S&P 500 managed to attain positive returns for 14 consecutive quarters in the mid-to-late 1990s but has otherwise never had a streak of more than nine such quarters.

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This country celebrates its 250th birthday next week.  The more one learns about world history and the more one looks around the world, the more amazing the United States is and how it came to be.  That’s not to say it doesn’t have its problems.  It clearly does.  And we seem to make a habit of doing things to jeopardize this great republic.  But the ideals that the nation stands on remain, albeit to some extent frayed.  Our economic and military might are incredible.  Of the 15 most valuable companies in the world, 13 are based in the US.  That’s an astounding statistic, considering the US represents only 4% of the world’s population.  We aren’t smarter than other countries, and there are many nations whose citizens probably work harder.   Yet our capitalist system has pulled the world forward economically.  Enjoy your Independence Day.
 

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Mark Oelschlager, CFA  

Oelschlager Investments 

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